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Winning in China: 8 Stories of Success and Failure in the World's Largest Economy

Winning in China: 8 Stories of Success and Failure in the World's Largest Economy

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Winning in China: 8 Stories of Success and Failure in the World's Largest Economy

Panjangnya:
219 pages
2 hours
Dirilis:
Jan 19, 2021
ISBN:
9781613631072
Format:
Buku

Deskripsi

If Amazon can’t win in China, can anyone?

When Amazon CEO Jeff Bezos visited China in 2007, he expected that one day soon China would be a double-digit percentage of Amazon’s sales. Yet, by 2019, Amazon, the most powerful and successful ecommerce company in the world, had quit China.

In Winning in China: 8 Stories of Success and Failure in the World’s Largest Economy, Wharton experts Lele Sang and Karl Ulrich explore the success and failure of several well-known companies, including Hyundai, LinkedIn, Sequoia Capital, and InMobi, as more and more businesses look to reap profits from the demand of 1.4 billion people.

Sang, Global Fellow at the Wharton School of the University of Pennsylvania, and Ulrich, Vice Dean of Entrepreneurship and Innovation at the Wharton School, answer four critical questions:
  • Which factors explain the success (or failure) of foreign companies entering China?
  • What challenges and pitfalls can a company entering China expect to encounter?
  • How can a prospective entrant realistically assess its chances?
  • Which managerial decisions are critical, and which approaches are most effective?
Sang and Ulrich answer these questions by examining the stories of eight well-known and respected companies that have entered China. They study:
  • How Norwegian Cruise Line’s entry into China displays how cultural differences can boost or sink different companies;
  • How Intel, one of the oldest, most respected firms in Silicon Valley, thrived in a country that seems to favor agile upstarts;
  • How Zegna, the Italian luxury brand, has emerged as another surprising success story and how it plans to navigate new headwinds from the COVID-19 pandemic.
Through these engaging and illuminating stories, Sang and Ulrich offer a framework and path for organizations looking for a way to successfully enter the world’s largest economy. History can be a teacher, and China, a country with 3,500 years of written history, has much to teach.
Dirilis:
Jan 19, 2021
ISBN:
9781613631072
Format:
Buku

Tentang penulis

Lele Sang is Global Fellow at the Wharton School of the University of Pennsylvania. A former journalist and editor, she has worked for the Beijing News and Caijing Magazine covering business and politics. She was also a visiting scholar at UC Berkeley, Graduate School of Journalism. She holds an MPA degree from the University of Pennsylvania. Karl T. Ulrich is Vice Dean of Entrepreneurship and Innovation and the CIBC Professor of Entrepreneurship and e-Commerce at the Wharton School of the University of Pennsylvania. His recent work focuses on innovation strategy, with a particular emphasis on innovation in China. He is the co-author of Product Design and Development (7th Edition, McGraw-Hill, 2019) and of Innovation Tournaments (Harvard Business Press, 2009). Ulrich holds bachelor's, master's, and doctoral degrees in mechanical engineering from MIT.

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Winning in China - Lele Sang

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Introduction

If Amazon Can’t Succeed, Can Anyone?

When Amazon CEO Jeff Bezos visited China in 2007, three years after his company entered the market, Amazon was already one of the two leading players in Chinese ecommerce, with 12% market share—not far behind Dangdang’s 18%. Bezos expected that one day soon China would be a double-digit percentage of Amazon’s sales.¹ Yet, by 2019, Amazon, the most powerful and successful ecommerce company in the world, had quit China.²

If Amazon can’t win in China, can anyone?

The overarching theme of this book is winning in China, the world’s largest economy. By 2025, China is likely to be the world’s largest economy by any measure.³ However, in terms of population and purchasing power parity, it is already the world’s largest economy.⁴ In roughly 40 years, a brief interval in most economies, China vaulted from productive anemia to economic might.

Any firm considering entering China is motivated primarily by one factor: the demand for goods and services from about 1.4 billion people. A foreign firm hopes to profit either from directly slaking that demand or, in the case of business-to-business (B2B) companies, from serving other companies that eventually touch consumers in places as diverse and far-flung as Beijing, the country’s capital, and Xi’an, once the Chinese terminus of the storied Silk Road.

Entry is only a first step: For profits to be realized, the company must possess and maintain resources that give it a competitive advantage. We call these resources alpha assets, and they include proprietary technologies, distinctive capabilities, recognized brands, and lower costs (chapter 1). Success elsewhere doesn’t guarantee that a company has these assets in China, as the country presents beguiling different challenges than other countries.

In this book, we answer four questions:

Which factors explain the success or failure of foreign companies entering China?

What challenges and pitfalls can a company entering China expect to encounter?

How can a prospective entrant realistically assess its chances?

Which managerial decisions are critical, and which approaches are most effective?

Why We Wrote This Book

The original idea was sparked by Lele’s disappointing experience with LinkedIn after she returned to China from the United States. She had been an avid LinkedIn user in America, using it regularly for news, career opportunities, and, most importantly, networking. She would reach out to school alumni, people she had met, or strangers whose profiles piqued her curiosity to connect with them and sometimes become friends or collaborators.

Yet that experience hadn’t been re-created in China. Few Chinese professionals on LinkedIn showed interest in her attempts at networking. She tried to reconnect to a former colleague with whom she had lost contact and got his response a full year later. His explanation: I’m happy with my job. I don’t normally go on LinkedIn. They then connected on WeChat, China’s dominant social media app, and never communicated via LinkedIn again.

A year before Lele’s return in 2014, LinkedIn officially expanded into China. As in each of its markets, the company positioned itself as the professional networking platform and pitched this idea hard. Yet seeing the lack of interest among her fellow Chinese in networking through LinkedIn, she doubted whether the firm was on the right path. (LinkedIn is featured in chapter 5.)

LinkedIn was not the only foreign company that concerned Lele, a former journalist who had reported on multinational corporations in China. There were others, including the company she worked for. She often found herself bogged down in unnecessary late-night conference calls with her US colleagues, being asked to implement strategies that didn’t fit China, waiting for each tiny action to be approved by headquarters, and hearing customers complain about how slow her company was and how fast their Chinese rivals could be.

These encounters, along with seemingly constant news about foreign companies’ challenges in China, inspired Lele to find out why foreign companies struggled so much. After she left a corporate job, she decided to write a book about multinationals’ failures in China.

Then she met Karl, who had spent years researching innovation in China as a professor at the Wharton School of the University of Pennsylvania. Karl was aware of the failures, yet also saw a diverse set of foreign companies that had become successful in China. They decided to collaborate, attempting to paint a complete picture of both failures and successes. Lele is Chinese and Karl is American, but each has spent a significant amount of time in both countries, and they share an enthusiasm for a more interconnected global economy. They wrote this book with the goal of learning from the experiences of the intrepid companies that have attempted to enter the Chinese market, to help foreign companies understand the realities of venturing into China, assess their chances of success, and guide their planning and decision-making.

Why Is China Special?

China is an especially attractive market because of the size of its population and the spending power of that population. Yet China has proved more of a puzzle to US companies than other large markets, like India or the European Union. First, the Chinese government plays an outsize role in guiding the economy. Second, tacit networks and relationships (guanxi in Chinese) are critical to the way business works. Third, the Chinese economy continues to grow at a blistering pace, and companies operate and innovate with commensurate speed—and so must foreign companies that want to succeed there. Finally, culture and language typically present a larger obstacle in China than they do in other large foreign markets, particularly for Western firms. Put together, these attributes create a unique environment, one that is both different enough and important enough that it warrants its own analysis. What worked for an American company in Brazil won’t work in China.

Defining Success

In conducting interviews for this book, we encountered both people who described failure and those who described success—and sometimes they were referring to the same company and events. One observer’s commercial flop could be another’s learning experience. Before we begin our analysis and case studies, we should be clear about the possible definitions of success and failure.

There are at least four ways in which a firm might succeed with its entry into China:

Positive financial outcome. Did the company realize a return on the investment?

Market significance. Regardless of financial return, did the company achieve recognition in the Chinese market? That is, did it move beyond being a niche player?

Organizational development. Did its parent company become stronger and more capable as a result of its China initiative, possibly through organizational learning, innovation, or recruitment of talent?

Options for the future. Is the firm better positioned to exploit future opportunities in China?

If we define success in these four ways, failure can be defined as their converses—as not achieving one or more of these four outcomes.

Of course, in some cases, observers indulge in the all-too-common tendency to revise history: What began with a financial goal becomes a learning experience when the former goal is not achieved.

Decision-makers in companies planning entry into the Chinese market need to be clear from the outset about their expectations. We believe that most managers are not motivated to enter China just to learn, to build organizational capabilities, or to open up options for the future. They aim to meet a significant portion of the demand in their category with sustained competitive advantage. This is the definition of success we adopt.

Why not focus on financial returns? From a practical perspective, directly observing financial returns for a unit within a multinational corporation is not typically possible for outsiders. However, financial returns must flow from success as we define it. Any firm that meets a lot of demand with sustained competitive advantage will earn a higher than average return on invested capital.

Why Do Businesses Fail in China?

Even a cocktail-party conversation about the causes of business failure in China reveals some obvious hypotheses, and in fact some of these are good explanations. They include the following.

Government

Most naive observers quickly point to government intervention in the Chinese economy as a primary driver of success and failure. They argue that the Communist Party of China either inhibits foreign companies or favors their domestic rivals. This has unambiguously been the case in some instances. Facebook, despite impressive efforts at building relationships in China and CEO Mark Zuckerberg’s enthusiasm for the country, is simply not allowed by the government to operate in China. Chinese government industrial policy may also assist foreign companies when there is a critical societal need. This is largely the story behind the automotive industry in China, which we discuss in chapter 4. But for most companies in most industries, there are few true regulatory barriers. And in other cases, the issue is more one of a company not being willing to play by Chinese rules. For instance, Microsoft offers its Bing search engine in China, while Alphabet doesn’t offer Google there. This is the result of Microsoft being willing to locate its data centers in China, with Chinese government oversight.

Business Ecosystem

Partnerships and business relationships matter in any economy—but especially in China. The Chinese use the term guanxi to refer to informal connections that assist in getting things done. Guanxi exists among individuals in social networks but also among organizations. For instance, Alibaba’s investors include Boyu Capital, a private equity firm with political clout; Citic Capital Holdings, an investment firm of state-owned financial conglomerate Citic Group; and CDB Capital, the China Development Bank’s private investment arm. And Alibaba’s success is rooted, at least partly, in deep political connections impossible for a foreign rival to achieve. This does not mean that foreign companies cannot develop guanxi, as Intel has done (chapter 8), but that the effort will demand careful selection of leadership and a long-term commitment to building relationships.

Product-Market Fit

Of course, the Chinese market may simply not need what a foreign firm offers. While most human needs are universal, preferences and practices are not. A foreign firm may not sufficiently adapt its products and services to the desires of its Chinese customers. LinkedIn (chapter 5) exemplified this problem.

Competition

Chinese investments require massive amounts of capital and patience, particularly in emerging categories. For instance, the transportation company Didi burned hundreds of millions of dollars per month in its fight with Uber in 2016. JD.com was willing to lose money for years to vanquish Amazon. Competition is not merely a question of will. The foreign firm may simply not possess sufficient barriers to domestic competition if its brands are not well known, if it lacks proprietary know-how, or if it does not enjoy significant production efficiencies.

Organizational Factors

Virtually every manager we interviewed pointed to agility—or the lack thereof—as decisive in success and failure. The Chinese economy changes at what sometimes feels like 10 times the speed of more mature markets. The extent to which a foreign firm operating in China must coordinate its actions with its headquarters abroad largely dictates its agility. The organizational structure of the unit in China, relative to the parent’s, and its autonomy in the country figure in every case in this book.

Organizational factors include more than structure. The qualifications and experience of the leadership team that runs the organization also help determine success. What are the required qualifications and experience? Must leaders be native Chinese with years of experience operating in similar roles in China?

Finally, commitment can determine success, in terms of time horizon, expectations, and patience around setbacks. Intel, which is featured in chapter 8, understood it would invest for 15 years before realizing an outcome. A common pitfall is a mismatch between the hoped-for payback period and the time required for success.

How to Read This Book

We begin the book with a conceptual framework for success (chapter 1), much of which applies to any setting, not just China. The book then considers case studies of eight companies: Amazon, Norwegian Cruise Line, Hyundai, LinkedIn, Sequoia Capital, InMobi, Intel, and Zegna. Some of the cases, like Sequoia, can be considered unqualified successes, and some, like Amazon, unqualified failures. But for others, like LinkedIn, the outcome remains to be seen. We start with two companies that have exited China: Amazon and Norwegian Cruise Line. Then we consider Hyundai, which enjoyed initial success and now faces challenges. The fourth company, LinkedIn, maintains its presence in China but acknowledges that success, as we define it, has so far been elusive. We then turn to four clear successes: Sequoia, InMobi, Intel, and Zegna.

We chose these companies to represent a variety of experiences and industries. Although most are headquartered in the United States, we also include companies from Korea (Hyundai), India (InMobi), and Italy (Zegna). Some companies have been in China a very long time, and some are relative newcomers. While it is impossible with eight cases to cover the full diversity of corporate experiences in China, we hope that our sample can provide models for companies yet to enter China.

Our Sources and the Challenges of Studying Failures

The topic of success and failure of an organization is likely to be sensitive in any context, and it’s even more so in China. Four of the companies we studied denied our formal requests for interviews and information. In most cases, principals still employed by companies would not agree to interviews, citing company policies. More surprising, perhaps, was that principals no longer employed by the companies in most cases would not speak with us, except on the condition of anonymity. The network of executives who have led multinationals in China is small and interconnected. Many of those we spoke to, although holding strong opinions, would not express them on the record. Yet, we were able to verify what we were told with public information, such as financial reports, employee head count, and company public actions. In researching the book, we interviewed no fewer than five insiders associated with each example, and, in most cases, many more. Additionally, we interviewed other executives, managers, researchers, and industry analysts—more than 100 in total. When possible, we quote our sources directly. In a handful of other cases, we refer to them anonymously or integrate what they told us into the narrative. We shared drafts of chapters for comment from those with direct knowledge of events. We believe that the resulting accounts are accurate. Inevitably, different individuals may have different recollections of facts or will disagree with the interpretation of those facts.

We admire all the companies we studied. They are all pioneers, regardless of what happened to them in China. Winning in China isn’t guaranteed, even with a smart plan and a capable team. In fact, we believe success is influenced in part by factors that are unknowable and unpredictable. Our goal here is not to assign blame or credit but rather to describe and interpret the experiences of bold companies for the benefit of those considering

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